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VAT Voice by Andrew Needham

Andrew Needham, Director of VAT Solutions (UK) Ltd, considers VAT aspects on the topical subject of property lettings.The ‘buy to let’ sector has grown quickly over the last few years, particularly the refurbishment of existing older properties, but what VAT reliefs are available?

The initial position for people entering this sector does not look good from a VAT perspective. The renting of residential property is exempt from VAT, but the renovation or conversion of the properties is subject to VAT. As such, you incur VAT attributable to an exempt supply, meaning that you either can’t register for VAT to begin with, or where you are already registered, you can’t recover any the VAT charged to you on that particular property

Urban Regeneration Scheme

In 2001, a concession aimed at this sector was introduced, and was further extended in 2002. However, it seems to be little known by either builders or developers. The concession is known as the Urban Regeneration Scheme, although it applies to all qualifying buildings wherever they are located. The idea of the scheme is to provide a reduced rate of VAT on work designed to upgrade existing housing stock. The problem is that as so few people know about the scheme, a lot of developers are still paying the full 17.5% in error.

The reduced rate is 5%, which gives an absolute saving of 12.5% on refurbishment costs, and applies if you are:

• converting a non-residential building into a residential building, for example a barn or warehouse conversion;

• you change the number of “single household dwellings” within a property, for example convert a large old house into four flats, or convert a bed-sit back into a single house;

• convert flats or a house into a bed-sit;

• refurbishing a residential property that had been empty for three years or more; or

• convert premises for use solely for a ‘relevant residential purpose’, for example a children’s or old peoples home (but the developer must give a certificate to the builder to get the lower rate of VAT).

To make things more complicated if you are refurbishing a block of flats and change the number of flats on some floors but not others, then the reduced rate will only apply to certain parts of the building. For example, you have a five-storey block of flats with three flats on each floor. The top floor is converted into one flat, so it is eligible for the reduced rate as you have changed the number of flats. The fourth floor has the internal walls moved and the size of the flats changed, but the number of flats remains at three, so the reduced rate will not apply to this work. The remaining floors are converted into two flats per floor, so they are eligible for the reduced rate.

Further details

Details of the scheme are contained in VAT Notice 708, so if your builder has not heard of the scheme, get a copy of the leaflet from the HMRC website and show him the relevant sections.

The scheme only applies to properties capable of separate disposal, i.e. each house or flat can be sold separately (even if you are only ever going to rent them out), so it will not apply to the construction of extensions and “granny flats”. It should be noted that the 5% rate only applies to the services of the builder, which means the developer or property owner cannot buy materials at the reduced rate. They will still be supplied with 17.5% VAT, so if you do the work yourself, the scheme will not apply to you.

January 2006

Andrew Needham
Director, VAT Solutions (UK) Ltd
Email: andrewneedham@vatsolutions-uk.com


VAT Solutions (UK) Ltd
11 Winmarleigh Street,
Warrington,
WA1 1NB

(T) 01925 242497
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(W) www.vatsolutions-uk.com

VAT Solutions (UK) Limited is an established independent firm of Chartered Tax Advisers, formed by Andrew Needham and Steve Allen. The company has a cross-section of clients from multi-national companies through to medium-sized and numerous smaller regional firms of accountants and solicitors. They produce a regular publication 'VAT Voice', which can be downloaded directly from the Internet via their website: